Lower interest rates may be curing the mild arrears problems of many lenders but the more outlandish lending practices of a couple of niche funders in the lead up to the credit crisis mean there are a number of mortgage-backed deals where arrears still exceed 14 per cent.Moody's and Standard & Poor's both published overviews of the mortgage-backed sector last week.Moody's observed that mortgage borrowers' ability to repay their mortgages, as measured by delinquency rates, continues to improve despite a backdrop of increasing interest rates. The overall rate reductions since September 2008 mean borrowers are still enjoying significantly lower repayments, and unemployment is still relatively low and is expected to peak at levels much lower than forecast at the start of the global credit crisis. Prime mortgage delinquencies greater than 30 days decreased to 1.14 per cent from a historical high of 1.63 per cent in January. Non-conforming mortgage delinquencies greater than 30 days also decreased to 11.47 per cent from a historical high of 17.44 per cent in January.S&P released its Australia & New Zealand ABS Performance Watch, September 2009, noting that the performance of the asset class in the third quarter was considered sound. Nevertheless, weak economic and industry conditions resulted in most transactions experiencing more losses than in previous quarters. Losses in less seasoned transactions were particularly notable.That said, arrears levels across portfolios were mixed and widespread rating actions are not anticipated. Rapid amortisation allows the build-up of a credit cushion for the senior notes but subordinated notes may be more exposed if the excess spread in a transaction is insufficient to absorb losses incurred. S&P notes that recovery rates on underlying defaulted receivables have been stable.Of the transactions surveyed, Liberty Small Ticket CMBS 2007-1 had the highest arrears level at 14.7 per cent, followed by Seiza Augustus Series 2007-1 at 14.1 per cent. The lowest arrears levels were seen in Illawarra Series 2004-1 CMBS Trust at 0.1 per cent (which should be close to fully amortised) and SMART Series 2008-3 Trust at 0.2 per cent.